Kyle Bass: PennyMac Mortgage Investment Trust (PMT)

Bass is a Dallas-based hedgie best known as a macro trader and as a major long-term bear on Japan. (I share Bass’s view on Japan, but that is another story for another day.)

But while Bass is best known as a “big-picture” macro guy, he’s also a talented stock picker. And he happens to share my current enthusiasm for mortgage REITs. His stake in PennyMac Mortgage Investment Trust (PMT) makes up 20% of his long portfolio.

I should clarify one point — I’m not a big fan of mortgage REITs as a long-term asset class. Unlike equity REITs, which invest in real property, mortgage REITs do nothing but buy and sell mortgages and mortgage securities. They’re essentially variable-rate bonds with all the risks of equities.

But to everything there is a season, and right now mortgage REITs are attractive. The spread between their borrowing and lending rates are some of the highest in years, and many trade for significantly below their book value. It’s hard to lose money when you buy dollar bills for 80 or 90 cents.

PennyMac currently pays a dividend of 10.3%, and it trades at book value. Rather than buy a single mortgage REIT like this, I would be inclined to buy a basket of several mREITs or to go the “one-stop shop” route and buy a mortgage REIT ETF such as iShares Mortgage Real Estate Capped (REM).